First Look: Formation Finance

Jul 22 - Michael McLarnon
First Look: Formation Finance

First Look: Formation Finance

The cutting edge cross-chain project that promises to revolutionise risk reduction and yield farming in DeFi

Risk Parity Protocol: Providing stability in an intrinsically high-risk, volatile marketplace

For any given unit of risk, the risk parity protocol will adjust the parameters to optimise the return: risk ratio. When applied to a diversified portfolio consisting of multiple assets, this will ensure yield maximisation over time. Part of the risk parity rebalancing mechanism involves pairing assets to counter-trend assets; a popular, sound strategy in traditional finance for minimising fundamental risk, re-applied here to crypto assets. The protocol promises to outperform even the most popular financially engineered strategies. Interestingly, their long term approach to DeFi trading addresses a much-needed gap in the market- crypto trading tends to be short term, with high risk and volatility considered implicit to the marketplace- and yet their risk parity strategy enables users to hold crypto assets in a long position for a high annual percentage yield.

A winning concept for a winning yield

Some readers may have heard of Ray Dalio, the renowned billionaire and hedge fund manager who founded the world’s largest hedge fund, Bridgewater Associates. His 2017 book “Principles” is a worldwide bestseller, outlining some of his practices, and has managed to further his reputation. Indeed, Formation Finance lists its seven guiding principles in a recent medium article (link) almost in emulation of his principle-based strategy.

Widely considered as one of the greats in the field of risk management and portfolio construction, he is both a pioneer of and advocate for risk parity.

The risk parity protocol by Formation Finance draws inspiration from Ray and his strategies; in particular, a freely available portfolio known as “All Weather” modelled off the famous Bridgewater fund. Cryptocurrency and DeFi are both still in their infancy, and we have seen time again how the integration of traditional strategies into DeFi is not only extremely successful but provides stability to the overall marketplace. If Formation Finance has even a fraction of the success Bridgewater experienced, it will be a more than worthwhile investment. Regardless, it is likely to be an invaluable tool to its users.

Who’s behind Formation Finance?

Formation Finance consists of a global team with varied experience in both cryptocurrency and traditional finance. The co-founders have all been previously involved in crypto “onboarding” and worked closely in both the conception and design of many other successful projects. Indeed, several of the co-founders are current CEOs of other blockchain projects. They have a strong team of initial investors from their first private sale in May, including GD10, Spark Capital, AU21, X21 Digital and Iconium, among others. A varied and successful team of strategic investors in Formation Finance should inspire confidence for all potential investors. The $FORM token is currently listed on Kucoin, Uniswap, and pancakeswap.

Token Utility

Although discussed further in future articles, the cross-chain aspect to yield farming with Formation Finance is highly significant; the average DeFi user tends to stay within the confines of a single chain to avoid paying excessive fees. This has the downside of leaving users vulnerable to the volatility of that particular chain and also unable to leverage cross-chain yield easily. Finance promises to be the first chain-agnostic DeFi portfolio manager that allows seamless integration across different chains, to maximise yield. This entire process is made possible only by four key index tokens and by the $FORM token itself.

The $FORM token is a triple-utility token encompassing governance, reward (profit) sharing and the dark pool (a Member-Only Price Discovery Liquidity Pool (AMMs)). Looking firstly at governance, holders of the token will have exclusive rights to DAO community voting. Reward sharing entails 50% of the protocol revenue being made available for staking, and the dark pool will provide $FORM holders with exclusive access to projects identified and backed by the crowd.

The tokenomics of $FORM are subject to change; this is in testament to the governance utility of the token. Irrespectively, they have been provisionally outlined in the graphic below.

Final Thoughts: “The Land of Absolute Return”

Formation Finance vows to meet you at “The Land of Absolute Return”. Through their ingenious risk parity strategy that has been thoroughly tried and tested on the stock markets, they might just deliver upon their claim. The utility of the $FORM token alludes to a strong appreciation and recognition of their community, and they have found a gap in the DeFi market through targeting long-term yield. With many recent successful projects boasting cross-chain compatibility, they also tick this box. Overall, we are impressed by Formation Finance and get a fundamentally professional and thorough feel from the project and its design that has captured our interest and gained our confidence as investors.

For more on Formation Finance head to Formation.Fi


By Michael McLarnon

Eds. Dr Deeban Ratneswaran

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